Down Argentine Way

A scene from Argentina’s collapse: source

There are many ominous parallels between Argentina and the U.S. and the question often asked is can America avoid the economic consequences that Argentina suffered from a fascist government combined with government debt and currency collapse? I believe the answer is likely NO!

There are a lot of ways to ruin an economy. Argentina has experimented with most of them. It has devalued its currency, and revalued it. It has pegged it, and then knocked down the peg. It has regulated, controlled, inspected, taxed and confiscated. Following the 2001 crisis, earnings fell by 30% – with half the nation slipping below the official poverty line. What is remarkable is that the Argentine economy has survived at all. – Bill Bonner

Down Argentine Way was the 1940 film that made a star of Betty Grable, who played an attractive young woman on vacation who fell in love with a wealthy racehorse owner. The storyline actually reflected a common occurrence during the 25 years prior to the film debut.

In the early 20th century, “as rich as an Argentine” was a common expression, often used in connection with poor British aristocrats attempting to marry off their daughters to wealthy Argentinians. Argentina was indeed a wealthy nation; for example, we all know about Harrods Department Store in London. Few realize that during this period of Argentine prosperity, Harrods also ran a store in Buenos Aires.

Buenos Aires is still a beautiful and interesting city. If you visit, you’ll learn that despite all the doom and gloom we hear concerning Washington debt and the dwindling dollar, there is life after debt repudiation and currency collapse. The same thing has been proven in Russia, Germany and other nations numerous times. It has even happened twice in the United States.

“May you live in interesting times” – A Chinese Curse

Since 2008, we’ve certainly lived in interesting times both in politics and in the markets. The US has tried standard Keynesian economic solutions with exploding deficits and trillions in government debt to solve the problems of mania, bubble and bust in real estate and the economy.

“Insanity is doing the same thing over and over again and expecting different results.” – Albert Einstein

If you haven’t noticed, the world is full of people who appear normal but by Einstein’s standard are insane. The problem for us is that many of them are politicians and government “leaders.”

Let’s Take A Quick Look At Some Insanity Closer To Home
Do you really think voting Democrat or Republican is going to give you less government or more liberty?

Will Americans ever vote in overwhelming numbers for a third-party candidate in a national election?
If you continue to lose money with a particular investment advisor, why do you count on the performance improving next year?

The US has been accumulating trillions in national debt since World War Two. Why would we think this will stop with the latest GOP victory in the House of Representatives or with the success of a few Tea Party candidates?

I believe America will continue down the same road toward less liberty and more debt until we reach the end of the road. There is no political solution using our special elite interests controlled two party system. We will trash the dollar and keep building up our national debt until the world stops buying our Treasury obligations.

In recent weeks, China, Brazil, Germany and France have warned the US to get its dollar and debt problems in order, to no avail. This will continue for quite a while, but just as our current foreign policies are opposed by most of the world, so our financial policies are now being questioned by world leaders and economists. One day the world will have had enough of our dollars and will tire of financing our debt. The dollar will cease to be the world’s reserve currency.

There is no way to know when this will happen; it could be next year or a decade from now. My view is before the dollar free-falls and investors flee Treasury debt the Washington politicians will be reaching hard for your wealth, to buy more time for their Madoff-style Ponzi schemes. We will see this begin with the 2011 congress and do not let your guard down because a few principled GOP candidates were elected because most are no better than the Democrats.

There is nothing unique about what we are going through as a nation; it has happened many times throughout history, to other countries. Here in the U.S. we have had so much prosperity that we forget that wealth confiscation and economic collapse are more the norm than the exception.

Look Back At Argentina in 1913
It was an important year.

While the British Empire was first in economic size, only the United States challenged Argentina for the position of the world’s second-most powerful economy. The nation was blessed with abundant agriculture, millions of acres of farmland, navigable rivers and an accessible port system.

The country’s level of industrialization was substantially higher than in many European countries and railroads, automobiles and telephones were commonplace. Argentina was one of the ten richest nations in the world, and the rate of economic growth from 1870 to 1913 far exceeded that of the United States or Germany.

In 1913 Argentina’s GDP reached 72% of the US level. But by 1998 it had fallen to 34%. What went wrong?

Politics and corruption, inflation and currency depreciation were in double digits from 1945 to 1952, from 1956 to 1968 and from 1970 to 1974 And they were in triple digits and then quadruple digits from 1975 to 1990. In 1989, the inflation rate peaked at 5,000%! In one month the Argentine currency fell 64% against the dollar. Finally, on April 28, 1989, the printing presses were shut down because the government ran out of paper for banknotes and the printers went on strike.

Argentina’s government defaulted on its debt twice between 1870 and 1914 and again in 1982, 1989, 2002 and 2004 (to foreign creditors). It led the world in selling IOUs to foreign investors, just as America does today.

On December 23, 2001, after GDP had declined 12% for the year, the government announced a moratorium on all foreign debt – $81 billion worth. It was the largest default in history. The 500,000 foreign creditors finally agreed to accept 35 cents on the dollar. China and other creditors of the US government should be looking at what happened in Argentina very closely.

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